Insights: Week Of July 4, 2022

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The Treasury Department this week issued a Fact Sheet detailing the US government’s framework for international engagements on digital assets. The framework details the US government’s planned interagency engagement on digital assets with foreign counterparts and in international fora. Treasury stressed that uneven regulation across international jurisdictions creates opportunities for illicit actors to exploit and imperils financial stability, while inadequate AML/CFT regulation, supervision, and enforcement by other countries challenges US efforts to investigate illicit international digital asset flows, such as ransomware payments and other cybercrime-related money laundering.  

Treasury says that the framework aims to encourage the development of digital assets while respecting “America’s core democratic values” and ensuring the stability and safety of the global financial system and international monetary system. The Department also promises to work with foreign partners and international bodies such as FATF, the Egmont Group of Financial Intelligence Units (FIUs), the IMF, and other standard-setting bodies to integrate digital assets, including central bank digital currencies (CBDCs), into the global financial system.

The framework is in line with the Biden administration’s focus on multilateral cooperation and improving collaborative relationships with partners and allies.

US firms and financial institutions exploring involvement in digital assets should perform a renewed risk assessment to determine their appetite for the challenges that come with customer and business partner due diligence, because new regulations of virtual assets are almost certainly on the horizon, and established AML regulations still apply. Banks, virtual asset service providers, and other financial institutions should adhere to their customer due diligence thresholds and remember the unique, decentralized nature of most digital assets when applying those standards—especially when conducting due diligence research to identify controlling individuals or entities.


Compliance and due Diligence

The UK imposed new economic, trade, and transport sanctions on Belarus this week, punishing the country for providing logistical aid to Russia in its war against Ukraine. Although Belarus is not a direct participant in Russia’s war in Ukraine, Russian forces have used the country as a staging area for their invasion.

Newly sanctioned Russian oligarch Vladimir Potanin, the largest shareholder of mining conglomerate Nornickel, is ready to discuss a possible merger with aluminum producer Rusal, as a response to Western sanctions. Potanin has sent a letter confirming his agreement to start merger discussions to allow “the creation of a national champion.” Potanin says the merger would allow the two giants to “even further diversify the shareholder base.”

The United States imposed new Iran sanctions this week, after Tehran’s continued lack of cooperation during the renewed nuclear talks last week. Fifteen individuals and entities that engaged in the illicit sales and shipment of Iranian petroleum, petroleum products, and petrochemical products have been designated by OFAC. The entities are based in the UAE, Iran, Singapore, Hong Kong, and Vietnam, and two vessels linked to Vietnamese trading and shipping company, Truong Phat Loc Shipping Trading Joint Stock Company, also have been included on the SDN list.

Congressman Ro Khanna has introduced legislation in the House of Representatives to issue a Countering America’s Adversaries Through Sanctions Act (CAATSA) sanctions waiver to India for its purchase of the Russian S-400 missile defense system. India signed the contract for the S-400 in 2018—a year after CAATSA became law—despite a warning from the then-Trump White House that the purchase may trigger US sanctions.

Google has been sharing potentially sensitive user data with a sanctioned Russian company for several months, even after numerous warnings by legislators that Russia could be exploiting its ad platforms. Google shared potentially sensitive user data with the sanctioned Russian advertising company RuTarget, owned by Sberbank, transacting with the company even after the invasion began, and only stopped when the media reached out for comment roughly two weeks ago.

India’s Directorate of Enforcement (ED) this week raided more than 40 offices of Chinese phone-maker, Vivo, over money-laundering allegations. The ED is investigating whether Vivo had any “significant irregularities in ownership and financial reporting” for several months. The ED claims Vivo transferred sales proceeds out of India to avoid paying taxes. The ED has blocked 119 Vivo accounts worth nearly $59 million as part of the investigation.

China’s cotton and apparel company industry underscores the importance of researching supply chains, especially after the US government began enforcing the Uyghur Forced Labor Protection Act (UFLPA) we discussed two weeks ago. For example, Anhui Huamao Textile Co. Ltd., which is located more than 1,200 miles east of Xinjiang, where China’s Turkic minorities are imprisoned, in 2019 and 2020 purchased nearly $7 million worth of cotton from Xinjiang-based cotton processing company, Xinjiang Lihua (Group) Co., Ltd., according to Kharon analysis. Xinjiang Lihua’s wholly owned subsidiary, Shaya County Lihua Innovation Cotton Industry Co., Ltd., has a cotton processing plant located in the Xinjiang Shaya Prison, raising concerns about the supply chain being linked to forced labor.

A Texas company, Ping Express, U.S. LLC that transferred millions of dollars from the United States to Africa has admitted in court that it failed to maintain an effective AML program. The company charged US customers a fee to remit money to beneficiaries in Nigeria and other African nations and failed to file a single suspicious activity report over a three-year period, despite a significant amount of suspicious activity. In less than three years, the company transmitted more than $167 million overseas, including $160 million to Nigeria. It faces five years of probation and a fine of up to $500,000, and its CEO and COO were recently each sentenced to 27 months in prison, demonstrating the US government’s commitment to criminally prosecuting banks and financial institutions if they ignore their Bank Secrecy Act obligations.

The EU is discussing the creation of an EU-wide sanctions authority, in an effort to implement tougher and more consistent enforcement of EU sanctions. EU officials may create their version of OFAC or give its planned Anti-Money Laundering Authority (AMLA) authorizing the body to enforce sanctions.

Bulgaria has blocked an $890,000 transfer to the Russian embassy in compliance with EU sanctions, after expelling 70 Russian diplomatic staff from the country. The Russian embassy had sought an exemption because the funds were needed to pay staff salaries, so Bulgaria is consulting with Brussels about a waiver.

Fraud and Abuse

FIFA’s Sepp Blatter and Michel Platini have been acquitted of defrauding the organization by a Swiss criminal court. The verdict followed an 11-day trial last month. Blatter announced his plan to resign in June 2015, ending his 17-year reign as the head of the organization after a massive US corruption investigation. Platini was investigated after a separate but cooperating case by Swiss prosecutors.

A hacker claims to have stolen one billion Chinese residents’ records from Shanghai police. The massive leak of personal data, which is likely the largest cyber breach in China, occurred because of a common vulnerability that left police data open to the public. Shanghai police records—containing the names, government ID numbers, phone numbers and incident reports of nearly 1 billion Chinese citizens—were stored securely, but a dashboard for managing and accessing the data was set up on a public web address and left open without a password.

Facebook’s parent company, Meta, is suing the US subsidiary of a Chinese tech company, accusing it of offering data-scraping services for Facebook and Instagram. The social network is also suing an individual, alleging that they set up automated Instagram accounts to scrape data from some 350,000 users. Meta’s lawsuit is against a company called Octopus Data, the US subsidiary of Shenzhen Vision Information Technology Co., that claims to have launched its core web-scraping (which a US court recently reaffirmed is legal) product in 2016.

The IRS has apparently been approving fake charities by the dozen, allowing millions in fraudulent activity to occur. The IRS’s EZ form fast-tracks the approval for new charities, allowing obviously fake charities that share PO box addresses with names like “American Cancer Society of Michigan” and “United Way of Ohio”—that have nothing to do with the American Cancer Society or the United Way—to operate and collect funds. One convicted fraudster got the IRS to approve 76 nonprofits, often despite glaring red flags of potential fraud. His operations stole the names of better-known charities and claimed to be located where they obviously were not.

Nigeria’s Customs Service this week seized 2,820 donkey skins worth $116,000, which were to be smuggled out of the country. The global trade in donkey skins has been driven by demand in China, where they are used as an ingredient in Ejiao, a traditional Chinese remedy. Donkey Sanctuary, an animal welfare charity, estimates that around 4.8 million donkeys are slaughtered each year to service that market.

Jonathan Ruiz and Charline Santiago have been arrested after allegedly running a sex trafficking operation that spanned six states. Between February 2020 and February 2021, the couple forced women into sex acts, with Santiago often driving them to hotels and waiting outside to accept payment in cash or on CashApp. Ruiz would beat the women, brandish a gun, withhold their personal identification, and force them to use cocaine. The couple would steal the women’s IDs to prevent them from running away and then use the identities to collect state and federal benefits.

Turkey this week released a Russian-flagged vessel that Ukraine claims was carrying stolen grain, ignoring a request to stop the vessel and cargo. The Zhibek Zholy moved at least 12 miles away from Turkey’s Black Sea port of Karasu before apparently switching off its transponder and disappearing from view. Turkish sources say it is headed toward Russia. Kyiv has also asked Turkey to investigate three more Russian ships it alleges are transporting stolen grain, but given the decision to release the Zhibek Zholy, Ankara likely will not cooperate.

The Gambian Ministry of Environment, Climate Change and Natural Resources (MECNARR) has banned the export and re-export of timber and revoked all timber export permits. Any timber cleared for import by the Department of Forestry, must have complete and duly certified import documentation including customs entries for every border it crossed before entering The Gambia. Although the country did not reveal the motivation behind the ban, but its timing coincides with an international crackdown on the illegal trade in West African rosewood, according to OCCRP.

Mexico’s FIU this week has accused ex-President Enrique Peña Nieto of handling millions of dollars in possibly illegal funds. Current president López Obrador made rooting out corruption the main theme of his presidency, but had not moved against any of his predecessors until now. The head of the FIU this week said that a company run by Peña Nieto’s family had “a symbiotic relationship” with a firm that received about $500 million in government contracts while he was president.

Despite pledges of zero deforestation by Brazil’s meat industry, cattle ranching remains the main driver of deforestation in the Amazon. A new investigation has found that Between 2018 and 2021, more than 90,000 cattle that were raised on stolen land in Pará state ended up in Brazil’s beef supply chain. Most were transferred to legal farms that supplied more than 100 slaughterhouses around the country, including facilities owned by two of the world’s largest meat companies, JBS and Marfrig. Experts say the companies do not do enough to check whether their supply chains include “laundered” cattle raised on illegal ranches.

The Indian ED is investigating crypto exchanges CoinDCX and CoinSwitch Kuber as a part of ongoing probes into alleged instances of foreign exchange violations. Although the crypto exchanges have not been accused of facilitating money laundering, their potential use by illicit actors is drawing attention from Indian authorities, and multiple agencies.

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